Economics: price elasticity of demand, price elasticity of supply, income elasticity of demand

what is price elasticity of demand?

its the responsiveness of demand to the change in price

what is inelastic demand?

• its when there is a big change in price, but small change in quantity demanded

• there is usually inelastic demand with products with very few substitutes, such as gasoline

how do you know if a product has inelastic demand?

if the PED is less than one, it has inelastic demand

what is elastic demand?

when there is a small change in price, and but big change in quantity demanded

what is perfectly inelastic?

• when the value of PED/PES is 0

• when the curve is a straight vertical line

what is perfectly elastic?

• when the value of PED/PES is infinity

• when the price doesn’t affect the quantity demanded

• when the curve is a straight horizontal line

what is unitary elastic?

• when PED/PES is exactly 1

• change in price is equal to change in quantity

• has a sloping curve

how do you calculate PED?

PED = percentage change in QD / percentage change in P

what factors affect PED?

• availability of substitutes: goods that have a lot of substitutes may have an elastic demand. if there are few or no substitutes, it will be inelastic

• degree of necessity: essential goods will have inelastic demand, since they are necessities. goods that aren’t essential will have an elastic demand

whats the relationship between PED and total revenue?

when theres a price change. there will be a change in the quantity demanded and so it’ll change the total revenue as well

what is price elasticity of supply?

the responsiveness of supply to a change in price

what is inelastic supply?

big change in price, but small change in quantity supplied

what is elastic supply?

small change in price, but big change in quantity supplied

how do you calculate PES?

PES = percentage change in QS / percentage change in P

what factors influence PES?

• factors of production: if producers have easy access to the factors of production, they can boost production, so supply will be elastic

• availability of stocks: producers that can hold stocks of goods easily can respond quickly to price change, so supply will be elastic. however, where its difficult to hold stock, such as perishable goods, supply will be inelastic

• time: the more time producers have to react to price changes, the more elastic the supply will be

what is income elasticity of demand?

its the responsiveness of demand to a change in income

how do you calculate IED?

IED = percentage change in QD / percentage change in income

explain the value of income elasticity of demand

• necessities: they are basic goods consumers need to buy, demand for these goods are inelastic

• luxury goods: they are goods that consumers like to buy if they can afford them, demand for these goods is income elastic

• normal goods: an increase in income results in an increase in quantity demanded

• inferior goods: an increase in income results in a decrease in quantity demanded

what are inferior goods?

• they’re often low cost substitutes

• the value of IED will be negative

• an increase in income results to a decrease in quantity demanded

what are normal goods?

• an increase in income results to an increase in quantity demanded

• the income elasticity will be positive

how is price elasticity helpful for businesses?

• when a firm changes its price, there’ll be a change in quantity demanded, and so a change in total revenue

• this helps them know the effect of changing prices

• this can help them to respond to the predicted changes

how is price elasticity helpful for the government?

• they often raise revenue by imposing indirect taxes, and they mostly target necessities

• popular targets for the government when imposing taxes are cigarettes, alcohol and petrol